Guidance for Employers on Handling Insurance Plan Distributions
Guidance for Employers on Handling Insurance Plan Distributions
Employers sponsoring group health plans often face times where they receive a rebate of premium dollars from the insurance carrier or, in the case of a self-funded plan, have excess plan funds. Recent regulations and actions, resulting from the COVID-19 pandemic, may create new distributions for employers to handle.
Currently, many insurance carriers are providing premium holidays to help employers weather the financial impact COVID-19 is having on their businesses and to help them maintain health benefits for their employees. Additionally, due to a decline in health care spending due to the current pandemic, many insurers may be issuing rebates in accordance with the Medical Loss Ratio (MLR) requirements. Recent regulatory guidance allows insurers to make advancements to already existing Affordable Care Act (ACA) premium rebates.
With all the various distributions and excess funds, employers need to understand their obligations as a plan fiduciary and whether they must distribute any part of the funds to plan participants.
Over the years, we’ve seen an increase in the number of questions from employers regarding premium rebates, holidays, and discounts concerning compliant options for distribution. Likewise, we are also seeing more questions from employers with self-funded health plans on how to handle distributions of excess plan funds. Legislation and regulation of the fully insured marketplace increases the likelihood that employers will receive these monies. The ACA, along with response to the volatility and cost of medical goods and services, drives the frequency with which these rebates or excess funds present themselves.
The MLR provision of the Affordable Care Act (ACA) requires insurance carriers to spend at least 80% of premium dollars from individual or small group plans on health care-related expenses and 85% on large group plans. Health care expenses include reimbursements for clinical services and expenditures to improve health care quality. If they don’t, the excess is returned to the policyholder, i.e., the employer in the case of a group health plan. If carriers do not meet this minimum ratio, they must issue a premium rebate to policyholders by no later than September 30 each year.
Employers with self-funded plans obtain premium contributions from employees who participate in their health plans. Often, the contributions exceed the actual expenditures. Employers, with the help of plan advisors and actuaries, may determine that it is appropriate to distribute some of the excess funds. Additionally, employers ending a self-funding arrangement or moving from one administrator or plan to another may need to reconcile excess funds that remain in the terminating plan.
Distribution of Health Plan Funds
Group insurance policy dividends, refunds, and credits can be plan assets in whole or in part for Employer Retirement Income Security Act (ERISA) purposes. Distributions are considered ERISA plan assets to the extent they are attributable to participant contributions. Employers should not automatically assume that the business gets to keep the full amount of the refund or credit.
What should employers do?
Determine what part of the funds are plan assets.
Any part of the refund or credit attributable to participant contributions will belong to the plan. Participant contributions are always recognized as plan assets per the Department of Labor (DOL) and if premiums are paid, in whole or in part, by participant contributions, an allocable portion of the distribution will be considered plan assets.
Premiums paid solely by participant or premium contributions held in a trust
all funds are plan assets
Premiums paid solely by employer
funds are not plan assets unless the plan document states otherwise
Premiums paid by both participant and employer
a portion of the funds are plan assets, either proportionately or as indicated in the plan document
Review plan document and other employee communications
to determine how the plan may govern plan assets and their distribution. This will limit just what employers may do with the funds. Other communications may include the Summary Plan Description (SPD), open enrollment materials, employee handbook, and communications from the Department of Health and Human Services (HHS) and insurance carriers regarding MLR payments.
Evaluate options for fund distribution.
The DOL provides guidance to employers on allowable methods of distributing plan assets. Employers must review the circumstances and determine the appropriate method of distributing fund to the participants.
What are the fund distribution options?
ERISA’s exclusive benefit rule states that "the assets of a plan shall never inure to the benefit of an employer and shall be held for the exclusive purpose of providing benefits to participants in the plan and their beneficiaries and defraying reasonable expenses of administering the plan.” Essentially, plan assets must be used exclusively to provide benefits to participants or for offsetting reasonable costs to administer the plan. Therefore, only specific methods exist.
Distribution of funds. These can be provided to both current and previous plan participants. Be aware though, if premiums were paid tax-free, through a cafeteria plan, as this would result in taxable income.
Provide alternatives to upcoming premium payments. Examples include premium holidays, discounts, etc. These can only be provided to current plan participants.
Providing new benefits or improving the existing benefits. Examples include adding accident, dental, or vision plans or other welfare benefits or making contributions to an HSA or wellness program. These can only be provided to current plan participants. [This option generally does not apply to plans that have not established a trust for premium contributions, per ERISA section 403(a).]
It is permissible to use plan assets to offset certain administrative expenses associated with the health plan. Examples include communication expenses, plan implementation, compliance ERISA, and recordkeeping.
In addition to normal rebates and discounts, COVID-19-related rebates and discounts create a few new dynamics that increase the frequency with which employers are receiving rebates and discounts. In each instance, employers will need to understand their options for use of the funds.
MLR standard rebates and advancement of rebates
The ACA requires insurance carriers to submit reports by July 31 of each that detail whether the insurance carrier met the MLR ratio requirement for the prior calendar year. If thresholds aren’t met, the insurance carrier must issue rebates no later than September 30. Carriers may provide a lump sum reimbursement or apply to the first month’s premium due on or after September 30. [Click here for more information on MLR provisions and distributions]
Due to the pandemic, the Center for Medicare & Medicaid Services (CMS), is extending the reporting and distribution dates this year. Insurance carriers now have until August 17, 2020, to file their reports for the 2019 calendar year.
Additionally, insurance carriers are given the option to estimate and distribute a portion of any rebate prior to September 30, if they do so in a non-discriminatory manner for all eligible enrollees within a state or market and as long as there is no state law that prohibiting this action.
If the advance payment is less than the total due, the insurance carrier must pay the difference in the same manner as it paid the advance portion, i.e., lump sum or premium credit. The amount must also be paid out even if it is minimal, i.e., de minimis. If it is greater than the actual rebate amount due, the excess can be counted in the 2020 or 2021 rebate payment due.
Premium holidays/discounts and refunds
Throughout the COVID-19 pandemic emergency, many employers struggle to maintain and fund their health care plans or plan premiums. Several insurance companies recognize these challenges and provide one-time or periodic financial assistance to help ease some burden while providing consistency in health care coverage for enrollees.
Premium holidays and discounts are the two most common types of assistance, but we are aware that some employers are also receiving refunds. In these circumstances, employers should follow the normal process for determining plan distributions, as discussed above. Employers must allocate dollars representing plan assets toward the employee’s premium contribution.